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Friday, September 03, 2010

Is Nanobrewing a Viable Model?

Every year or two a new trend sweeps through craft brewing--some are larger, structural trends; others are small and aesthetic. Some last, some fade. One of the biggest trends of the moment is nano-brewing. For a longer primer on what "nano" means, have a look at Ezra's post at the New School; for our purposes, let's say that nano breweries are less than three barrel systems, usually (but not always!) disconnected from a pub. In Oregon, Heater Allen blazed the trail, and now there are a handful of others like Natian and the newly-minted Beetje. Although they're not much bigger than home-breweries, they compete against Widmer and Deschutes for tap handles.

The upside is pretty obvious: low start-up costs. Small commercial brewing systems can be had used for less than $100k, but can run a lot more than that if you sidle over to JV Northwest for a new brewhouse. One-barrel systems look expensive compared to homebreweries, but are cheap by comparison to 10-barrel systems. For the average person, a nano-brewery represents a conceivable initial investment. The big question I have is: is it a viable business model.

Brewing is hard work and the margins are pretty slim. If you don't own your own brewpub, the way to make brewing profitable seems to be selling a lot--which is why production breweries try to get bigger systems on line. The cost of a unit of beer drops when a brewery gets bigger and more efficient--which makes the profit margin larger. On a recent ProBrewer discussion thread, nano-hopefuls discussed whether the model penned out or not:

So, to calc the P&L stuff, I started off choosing three recipes to launch with. I calculated the ingredients needed to brew one batch of each, and got pricing from suppliers to give me a rough estimate of a cost per batch. I used (arbitrarily) a three month production cycle, and based on my brewing schedule came up with a) ingredients needed on hand per cycle, and b) amount of saleable beer produced per cycle. I then came up with sample sales percentages for new growlers, refilled growlers, and free samples given away at the brewery, as well as sample pricing for the growlers. This gives me a rough idea of income, assuming I sell all the beer produced. I would also be trying to land draft accounts, so I have to build that into my sheet.... My initial findings, after playing with all of this, is a nano is **at BEST** a breakeven operation.

So why on earth would you start a nano-brewery? To go big. Here's that same brewer describing his goal:

The only way this venture makes sense is if I can leverage my tiny production runs to build a brand, build a following, and then expand. It is a proof of concept - a pilot program, if you will, for a production brewery that does not exist yet. Trust me, I'd rather go huge, but I will not put myself in enormous debt and risk my home and personal assets, and I do not want to seek outside investment at the level I would need right now.

I once aspired to make movies, and I recognize this model from that industry: you make a calling-card short and use it to sell financial backers on your idea for a feature. For the DIY brewer with more energy than money, it's a way of getting into the business without taking on a huge amount of risk.

The biggest downside I can see is that small systems are harder to use and more prone to inconsistency. Quality control is a bigger issue. Having a tiny brewery limits the kinds of beers you can make--nothing that requires months or years in tanks or barrels, for example.

But within those confines, is it possible for the little breweries to get started, build a following, and then go big time? We'll see. For a shot in the arm, nanobrewers can look to Rick Allen, one of the early pioneers: his Heater Allen Brewery has made the transition to a regular micro system and seems to be humming along.

Had a chance to stop in and see Rick Allen in McMinnville this spring and talk about his operation. Great guy, great beer. He's found a niche: lagers in a land of ales. As you suggest, scale has probably allowed him to perfect his technique and style before building up.

I'm not sure this would work in a land that doesn't welcome (nay, crave) variation among the taps, but I don't live there. Bring on the nanos!

It is interesting to compare this to the model of the 1990s - building on the cheap with used equipment (often from dairies). Frankenbrew was filmed then and is a little dated, but the point was to build a brewery for less than $20,000, then use the profits to add more modern equipment and perhaps expand.

Smaller batches also lower the risk on any individual brew; if a batch goes bad, or if it just isn't a good recipe, you've invested a whole lot less in spoiled inventory. Plus, the brewer can travel the experience curve before putting significant capital at risk. All good reasons to start small.

Maybe we can pool my brewing system and yours together! Create a micro nano!

Seriously... if you have money backing your business plan and start a nano to test the market with recipes, its not a bad idea. Sell your experiments!

If someone is throwing caution into the wind with no business plan and think they can be successful by opening a brewery in their basement with a RIMS SABCO brewing system... they're just yanking their crank and hoping for a miracle. Of course, miracles do happen, just not that often. One way or the other, you need a financial backing or plan to grow and/or succeed. ;-}

Given the above, it would seem a market might exist for a nano-brewery macro pub. Essentially renting out well controlled (i.e. maintained) brewing systems to those who fork out a small fee for the right to brew a 3 to 5 bbl batch. Then the batch has a guaranteed tap or bottles at the brewery if it does well, the brewer gets some return and reputation - if not, well, the loss is mitigated, and the operation owner takes no risk. 3 BBL is roughly 756 pints (I think, I am going from foggy memory here) and I think I can see a financial model where this might make sense.

I'd try it... heck, even if the best I could hope is a good word for my beer and break even, better to learn the lessons involved while not investing in primary capital.

Come to think of it, I'd try the other way as well - the right managing partners, and this could be a uniquely interesting pub in town, and a good place to market all sorts of ideas.